They grew users by 200x in 2 months
They grew from 10 million daily participants to 300 million participants. That’s 30 times, not 200 times.
It’s still enormous, incredible, something that has never been done before by a tech company, ever, but it’s NOT 200 times.
Best,
Saul
“I just click on a link and it works and then I’m done” they say. THAT is the moat. It’s the product.
Sorry, that isn’t a moat. A moat is, for example, what Intel has. A fab costs billions of dollars, especially if it is class 1 or better. That is a major obstacle for entry into that space.
Unless Zoom has patents, another company with competent programmers can write code and enter Zoom’s space.
Instead of a moat, Zoom has to rely on being faster than the other sprinters. They have to innovate first, be faster implementing new features, etc. They may have done that so far given they went from zero to a significant competitor in a relatively short time.
But that’s not a moat. They’re going to have to keep sprinting.
A patent moat can be very nice … but it doesn’t keep one from having to keep sprinting because other companies can come up with their own technology which doesn’t violate the patent and may be patentable in turn.
A brand moat seems like it is less powerful than a patent moat, but it requires the competition to not only come up with an equally good product, but they also have to achieve the recognition and use of that product to overcome the existing brand moat. This is not trivial.
Fair. But how many of those companies had competitors that gave away competing products for free?
A free burger costs a heck of lot more than a free Zoom.
I think MSFT and GOOG in specific will be able to give away competing products for free that are almost as good as ZM.
No offense but you just don’t get network effect. If everybody is Zooming it makes no difference what other free stuff is out there. It’s not Zoom, Microsoft, or Google who decide the outcome, it’s the market, it’s the users.
I’m cheap - so speaking for myself, I would take the free option even if it was not quite as good.
But you are getting the good Zoom for free! Why take the crappier free?
We shall see. I’m rooting for you to make lots of $ - I just can’t get into this one myself.
Great! This board’s motto is that everyone should to make up his/her/its own mind.
Denny Schlesinger
It’s still enormous, incredible, something that has never been done before by a tech company, ever, but it’s NOT 200 times.
In The Gorilla Game it’s called “The Tornado” when product is flying out the window and it’s usually a yearly doubling. 30 times is a super hurricane sized Tornado! While these are not all paying customers the network effect they create is extremely powerful.
Denny Schlesinger
A brand moat seems like it is less powerful than a patent moat…
A metaphoric “moat” is anything the competition cannot cross. Just because the competition can write the code does not mean it can break down a well established network effect. Why are brand names moats? For at least two reasons, 1) quality assurance, you know what you are getting, and 2) positioning, a marketing concept. Read Positioning: The Battle for Your Mind Kindle Edition by Al Ries, and Jack Trout
https://www.amazon.com/dp/B006B7LQ90/
In commodity markets price has a huge impact on purchases but in high tech and other increasing returns products the outcome is not decided on price. Authors as diverse as economist Brian Arthur and Silicon Valley marketing consultant Geoffrey Moore (The Gorilla Game) agree that it’s the market that picks the winner at random. Moore’s advice is “buy the basket and sell the losers” but I prefer to wait and buy the winner.
Denny Schlesinger
Captaniccs,
I’ve read the arguments you and 12x have had regarding the ‘weak network effect’ where a person uses a product because others are using it vs the ‘strong network effect’ where you must use a product because you are not able to engage with this other person unless also subscribing/paying for said product.
I’m thinking Zm is the first of the two: being a product that only the sender must subscribe to use.
Do you agree? Or maybe it’s not that simple of a difference? I’m educated I’d literally bow to you 
if I were to meet you in person.
Thanks,
Jason
Oh yes… I have Zm as 12% position for a whole bunch of reason and I’ve permanently saved several of your posts that write them out so clearly.
Thanks you,
Jason
They grew from 10 million daily participants to 300 million participants. That’s 30 times, not 200 times.
It’s still enormous, incredible, something that has never been done before by a tech company, ever, but it’s NOT 200 times.
Best,
Saul
And what if they grew paying subscription accounts by 10% of that 30 times user growth? That gives them 3 times more paying customers than they had in December but their stock price is up less than 2.5 times the $70 it was in December?
Does this next ER not feel like it could deliver a 30-35% jump?
Tim
First, let me say that I’m sorry if I annoyed or offended anyone with my ZM comments - that was not my intention, but I can sometimes come across the wrong way in electronic communication. I’m relatively new here and I don’t want to wear out my welcome. So, please accept my apologies if I came across badly.
Second, let me say that I wish I had been part of this board 5 or 6 months ago - I probably would have bought some zoom at that point. It’s my loss for being skeptical of this company. Several of the companies I have made my biggest bets on are down, so I’m obviously not great at this investing thing. I’m a novice trying to learn - so the main reason I’m bringing up this argument is that I’m trying to understand what I’m getting wrong.
Third, I’ll make one more comment and then probably not respond any more on this particular stock. Someone mentioned Google as an example of a company that had competitors giving things away for free and was able to succeed - but the reason was (as you said) Goggle also gave away their service for free. Not only that, but they continue to give away many of the things they do for free. That’s why no one switched to other free services - there is no need to switch if the best offering is already free. So, in my opinion, if Zoom wants to continue getting the same growth in eyeballs (over the long term) they will also need to give their service away for free. I am certain that Google and FB want those eyeballs. They will develop products that are 90% as good as Zoom and that also work with the click of a button. IMO people will take the free offering.
Is it a great company, great product, great management - yes to all.
Is it growing like crazy - yes.
Is the product relatively easy to copy - I think so.
If 2 products are very similar, and I can get one for free, I’m probably going to choose the free one. Especially if the world does go into a recession.
Peace. And sincerely, I wish the best of luck to the ZM longs.
I’m thinking Zm is the first of the two [‘weak network effect’]: being a product that only the sender must subscribe to use.
Do you agree? Or maybe it’s not that simple of a difference?
Congratulations, “it’s not that simple of a difference” is the right answer. Businesses like tele-conferencing are complex systems, it’s very hard to pin down just why the winner is the winner. And it does no really matter, what matters is that they are the winner because with increasing returns type business “The more you sell, the more you sell!”
This article is 25 years old!
The More You Sell, the More You Sell
Brian Arthur’s theory of “increasing returns” is revolutionizing economics. It’s also why the DOJ stopped the Microsoft/Intuit merger.
If the battle between the US Department of Justice and Microsoft is the geek version of the O. J. Simpson trial, then Brian Arthur is the star DNA expert. Arthur - a professor of population studies and economics at Stanford University, and external professor at the Santa Fe Institute - is the founding father of “increasing-returns economics,” a new branch that is examining how dominant players in emerging markets can stifle innovation by locking people into inferior technical standards. Think of the old battle between VHS and Beta, and you begin to understand why superior technologies don’t always win the tug of war for market share.
https://www.wired.com/1995/10/arthur/
It might not matter to the investor but it sure matters to the CEO of a company trying to compete in the market. I’ve been in IT most of my professional life and I had the good fortune to create the website for our marina. It was a terrific learning experience.
Lesson number one: Half of your audience are not people, it’s robots, search engines. If you don’t design for search engines people won’t find your website. Someone from Argentina visited the website and the search word he used was “snow!” Snow? WTF does snow have to do with warm, sunny Caribbean marinas? I could not recall using snow as a keyword. It turns out that one of our landing pages talks about sightseeing which surely visiting sailors love to do and Venezuela does gave one or two very high snow peaked mountains.
Here is a collection of stories I have written about designing websites. While it’s not Zoom specific in any way it should give you a good idea about how strange and unexpected the WWW is. Eric Yuan didn’t plan for covid-19 which might turn out to be the most influential event in is business life.
July 5, 2011
Denny’s SEO Anthology
Without a doubt, Google has influenced the World Wide Web more than any other company with the possible exception of Netscape which fell victim to competition. The ability to search millions of pages and to get meaningful results in seconds is awe inspiring. But as a consequence, Google’s Robots have enslaved all of us who want to have successful web pages. It’s Search Engine Optimization (SEO) or die. For me it has been a wonderful adventure, full of exciting surprises. Here is a list of my SEO related essays over the years which you might find interesting.
https://softwaretimes.com/files/dennys+seo+anthology.html
To close, Saul keeps repeating that he is not an expert and that might be his greatest asset, he does not get bogged down with the details. He looks at businesses as investments, “Does it move the stock price needle better or worse than some other business?”
Don’t sweat the details.
Denny Schlesinger
It’s OK to ruffle a few feathers if it leads to good discussions. We tend to become defensive which is not a good idea.
Someone mentioned Google as an example of a company that had competitors giving things away for free and was able to succeed - but the reason was (as you said) Goggle also gave away their service for free. Not only that, but they continue to give away many of the things they do for free. That’s why no one switched to other free services - there is no need to switch if the best offering is already free.
Google’s network effect is more complicated than that. Google had first mover advantage, initially it was competing mainly with directories which are much less efficient
http://infolab.stanford.edu/~backrub/google.html
as a result Google had a large audience which then drove its network effect.
• Because over half the web users searched with Google, SEO experts optimized websites for the Google search engine
• Because Google gave the best search results, users flocked to Google
Once that whirlwind takes hold it’s practically impossible to stop it.
Denny Schlesinger
WWW wars: directories vs. search engines
My disagreement with professional SEOs about the relative merits of directories vs. search engines.
March 29, 2005
https://softwaretimes.com/files/www%20wars-%20directories%20…
Reminds me of the discussion around capturing eyeballs/clicks during the internet boom. Valuing companies based on activity level doesn’t always translate to earnings. They will need to develop a way to monetize the growth which they haven’t at this point; however, the market believes that they have a path forward and it could be another Google or Facebook based on the current valuation. I am a shareholder and rooting for Zoom, but watching the numbers closely.
John
Hi John,
When comparing this discussion to valuing a company based on clicks I feel that not entirely wrong; but, I wonder if you read the articles that Denny provided earlier before making this comparison?
It is complicated. Thanks Denny for all the links.
Jason
I felt it worth calling attention to this: As others have alluded to in this thread, the money is on the corporate side and management has been VERY clear that this is their focus. The CEO essentially said the consumer users are a distraction he doesn’t love. I see the free individual consumer users as fuel for the wider network effect. I’ve written about this recently on this board. He is well aligned with us investors on this point.
The “moat” or defensible value proposition:
This tech is stickier than it feels many here think. Barrier to entry forms part of a moat. A small one in this case though, in my opinion, but at the enterprise level it IS important; much more than for individuals who might use GoogleMeet or WhatsApp. These “competitors” aren’t really an option for many enterprise level clients. For example, we needed a solution that ran on Linux, and Windows and Mac, and allow people on both sides of the firewall to communicate with each other. We need physical meeting rooms and workstations to communicate securely internally and with external employees, clients, vendors, etc. Once MS Teams was written off for quality reasons and once all of these factors were included in testing, Zoom was really the only option. It was a “no-brainer” decision. This is awesome for us investors.
Software can be a moat even without patents! Just because another company can write code you can NOT extrapolate from that that another company can write the Zoom platform. Developing good things is HARD. Code is just text in files. Software is SO much more. It is design, company culture, layers of legacy and new; always a work-in-progress. It is the integration of the technology stack, hardware, dozens if not hundreds of little components and modules each with its own considerations, APIs, assumptions, etc, etc, etc. Zoom has the entire mix working well, designed from the ground up for enterprise customers who REQUIRE quality AND stability to avoid embarrassing situations with clients or wasted time during expensive meetings. Zoom has done this better than everyone else. This is a HUGE deal, and barrier. …and the scale-up…amazing…30x is already an old number. I wonder what it is today.
Zoom is a platform, not just video conferencing. They have an API and app marketplace that has barely been explored. Here are just a few dozen (not all) of them. Pop this open and scan the logos: https://zoom.us/integrations. Any time an integration is used it makes Zoom a little stickier, or bundled in.
I originally added the following to the list below instead, but I think it adds to the point just above: We have all been focused on the video communications side of Zoom but that is the “land” in “land-and-expand”. Zoom Phone has the potential to be hugely lucrative! (And even stickier?)
https://zoom.us/phonesystem
https://www.uctoday.com/unified-communications/ucaas/zoom-ph…
I’m sure there will be more services to come.
While not really part of a moat, these 2 points are large in my mind
Here is the real kicker: If free users stop using Zoom, Zoom will probably be better off. They just take resources. Sure the network effect loses this particular feedback loop, but I don’t think it is as critical at this point. Zoom is already known. In fact, the whole network effect probably grows less important from this point due to brand recognition. Zoom will likely already be near the top of any list of options.
“[Google and FB] will develop products that are 90% as good as Zoom and that also work with the click of a button. IMO people will take the free offering.”
I hope I did a good job of explaining here why this doesn’t concern me. Zoom, and us as investors, profit from entreprises where these two are not offering anything that is really a feasible option. MS Teams is a more direct competitor, and already exists, and Zoom is winning share (rightly so, in my opinion).
Off-topic?..
“Second, let me say that I wish I had been part of this board 5 or 6 months ago - I probably would have bought some zoom at that point. It’s my loss for being skeptical of this company…”
If you are implying you feel like you can’t invest because you missed the boat that is one of the biggest mistakes people make. I bought zoom 3 times over the last year, ranging from around $55 to $140, because I think over the next 3-5 years they will be a very good investment. While valuation can be a factor, when a company does well and the price compounds for a couple years, $20 on the Zoom price today will be meaningless.
Here is the real kicker: If free users stop using Zoom, Zoom will probably be better off. They just take resources. Sure the network effect loses this particular feedback loop, but I don’t think it is as critical at this point. Zoom is already known. In fact, the whole network effect probably grows less important from this point due to brand recognition. Zoom will likely already be near the top of any list of options.
Since “stories are in” let me tell you one. Why would plants make honey for bees to steal? What a terrible waste of resources! The reason is SEX! Since boy plants can’t visit their girl friends they need birds and bees to have SEX! Imagine that! Plants invented tele-SEX millions of years before we had ZOOM!
Anyone in sales knows that you need an inventory of prospects to sell to. Right here we have discussed the difference a simple vs. a complex sale process means. Complexity is the enemy of adoption. Thousands of free users are a godsend to Zoom, a terrific pool of prospects they can convert to paying customers. The resources spent on free users would have to be spent on a salesforce to find and convert prospects. Anyone using Zoom for free is a self identified prospective customer.
The CEO essentially said the consumer users are a distraction he doesn’t love.
I’ve commented on this before. I sure hope he sees the error in this way of thinking. The Pareto or Power Law distribution says that 20% of your customers produce 80% of the revenue. There is no arguing with that. Way back when I was working at Colgate-Palmolive and the comptroller asked me for a sales report. Having learned about the Pareto distribution I proposed a report sorted by revenue. The comptroller was skeptical but I told him that if it was not satisfactory I would produce a traditional sales report by zone, etc. My report started a revolution that allowed Colgate to reduce delivery time by 50% from 48 to 24 hours the time it took our principal competitor, Procter & Gamble, to deliver. Colgate also was able to close down the Caracas warehouse saving lots of money. All this seems to back Eric Yuan’s thinking but it’s only part of the story. Instead of a single one-fits-all sales process, Colgate-Palmolive in Venezuela developed two separate sales methods, one for the 20% of large customers such as supermarket chains and a totally different one for small retail stores, the 80% or so called long-tail. I can only take credit for the unorthodox sales report.
My wish and hope is for Zoom to create a small user version for the long tail.
Denny Schlesinger
I felt it worth calling attention to this (About Zoom)
Thanks RafesUserName,
That was a superb post and I really appreciate it. I’ve probably said it before but glad to have you on the board.
Saul
Just to clarify, I do not think that Zoom should, or will, stop using free accounts. I attempted to draw a distinction between free consumer users and free accounts for enterprise. Since this has always been an enterprise-focused business, anything that brings them more enterprise subscriptions is absolutely a good thing! I’m not sure yet how valuable free consumer accounts will be going forward. I think they were massively important over the last couple of months, but I’m talking 1, 3, 10 years from now. In other words, I think each new individual (non-enterprise) free user is probably less valuable to the future success of the business than it was two months ago.
That said, I actually agree with you. This point is too speculative and taking only the recent past in to account, I hope we see a lot more of the same, and I hope that translates into positive bottom line growth as an investor.
One has to remember that free accounts are required for anyone who is not playing host. I.e., if you want to have a meeting with 3000 attendees, you need a host that can support that volume and you need 2999 free copies for the attendees … unless they also host at other times.
And, as has been mentioned many times, using the free copy can often provide the incentive to buy a paid copy, whether enterprise or small.
E.g., my favorite winery, which is small enough that they only produce about 3000 cases a year, is about to hold a Zoom meeting/tasting for fans of the winery. This got started by the winemaker attending two different kinds of local events, things which had been in person, like an exercise class, but had moved to Zoom. Now they are buying a paid copy so that they can host their own event.
Swiftest,
Great answers - thanks for taking the time to type that out (Regarding ZM). Your points make sense - and I will give it some deeper consideration.
On the topic of “being too late to buy because the price has gone up”. Yes, I know exactly what you mean, and I agree with what you are saying. However, its a combination of current high valuation (IMO) vs. lack of confidence in the company/product. Even though I’m coming around to the POSSIBILITY of this being a long-term winner, I’m not confident enough to buy it at the current valuation. I expect there to be a big dip at some point, and I’m willing to wait for that while I continue to research and think about investing in it. I’m ok with possibly missing it if it keeps going up from here - and I’m still not 100% sure I really want to buy in yet anyway.
Thanks